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Will FTC Probe Of Largest For-Profit College Lead To Another Billion Dollar Taxpayer Bailout?

In late April we predicted that for-profit college closures would trigger the next multibillion dollar taxpayer-sponsored bailout in America. 

At the time, Corinthian Colleges had abruptly shuttered what remained of its campuses, marking an unceremonious end to a slow motion wind down that had been in the works for quite some time. 

As we noted then, delinquencies and defaults on student loans are far worse for borrowers that attend for-profit colleges. This, along with poor graduation rates and allegations of deceptive marketing practices, has led to increased government scrutiny of the for-profit sector, scrutiny which ultimately caused Corinthian to wind down operations last year amid allegations it falsified job placement rates.

The company received nearly $1.5 billion per year in financial aid funding from the government, meaning the US taxpayer was subsidizing federal loans to students who very well may have been getting a subpar education and were thus even more likely to get behind on their loans and eventually default. Corinthian was able to sell off many of its campuses in November and although the writing had been on the wall for quite sometime, the sudden closure of its remaining physical campus still came as a surprise to students and faculty.

The reason this matters is that the law allows students to apply for debt relief from the Department of Education when the school they attend is closed and found to have defrauded attendees. Here’s an excerpt from a Reuters piece that ran shortly after the closures:

More than 50 consumer and labor organizations sent a joint petition on Tuesday to U.S. Secretary of Education Arne Duncan, urging him to cancel federal student loans owed by 78,000 who attended Corinthian schools.

 

The groups, including the National Consumer Law Center, said the Department of Education had the authority because Corinthian misrepresented its job placement rates and defrauded students by enrolling them in high-cost, low-quality classes.

What’s critical to understand here is that, as noted last month, "these institutions rely heavily on federal student loans for their very existence [and] tuition rates at for-profit colleges are, on average, double the rates charged by large public universities, a fact which explains why nearly 90% of students at for-profit schools have taken out loans to pay for their education."

So these students are i) almost certain to have borrowed from the government, and ii) their loan balances are almost certain to be higher, on average, than loan balances for students at public universities.

When you combine this with the government’s ongoing crackdown on the for-profit sector and the fact that if the government closes a for-profit school, the students are eligible for debt relief, you have the perfect recipe for massive taxpayer-funded bailouts of heavily indebted students. 

Anyone who thought we were exaggerating when we predicted a multibillion dollar hit for taxpayers got a rude awakening when, early last month, the government announced plans to write off nearly $4 billion in loans for students that attended Corinthian.

The takeaway, as we wrote way back in April, is this: The real question now is whether continued pressure on for-profit colleges will result in further closures and more petitions from hundreds of thousands of students with hundreds of billions of loans they now know can be legally discharged. 

Well, sure enough, the government is now looking into University of Phoenix parent Apollo Education. Here’s Bloomberg

Apollo Education Group Inc., owner of the University of Phoenix for-profit college chain, fell as much as 9.4 percent after U.S. regulators began investigating possible unfair advertising and marketing.

 

The Federal Trade Commission demanded information on enrollment, recruiting, financial aid, tuition and other business practices from 2011 to the present, Phoenix-based Apollo said in a filing with the Securities and Exchange Commission. Apollo said it will cooperate fully.

 

The FTC and other government agencies are examining the practices of for-profit colleges amid concerns they are recruiting students with misleading pitches about the value of their education. Downers Grove, Illinois-based DeVry Education Group Inc., another for-profit college chain, received a similar notice from the FTC last year and said it is cooperating.

From the filing:

Apollo Education Group, Inc. announced that it received yesterday a Civil Investigative Demand from the U.S. Federal Trade Commission. The Demand indicates that it relates to an investigation to determine if certain unnamed persons, partnerships, corporations, or others have engaged or are engaging in deceptive or unfair acts or practices in or affecting commerce in the advertising, marketing, or sale of secondary or postsecondary educational products or services or educational accreditation products or services. The Demand requires Apollo to produce documents and information regarding a broad spectrum of the business and practices of its wholly-owned subsidiary, University of Phoenix, Inc., including in respect of marketing, recruiting, enrollment, financial aid, tuition and fees, academic programs, academic advising, student retention, billing and debt collection, complaints, accreditation, training, military recruitment, and other compliance matters, for the time period of January 1, 2011 to the present.

We're quite sure we'll be discussing this extensively sooner rather than later, but for now we'll close with an excerpt from US News & World Report on Corinthian's bankruptcy and a screenshot from Apollo's latest 10-Q. Bearing in mind that the Corinthian closure may cost taxpayers $3.6 billion, see if you can determine why a government mandated shutdown of Apollo could present a problem.

In court documents, Corinthian listed total assets of $19.2 million and total debts of more than $143 million. At its peak during 2013, the company operated more than 100 campuses in states such as Arizona, California, Hawaii and Oregon, and enrolled more than 81,000 students, according to court documents.